Building a New Home vs. Buying an Existing Home: The Breakdown (Part 1)

If there is one eternal question that I have never seen answered in my 27 years in the real estate business, it's this one: Which is a better investment - building a new home or buying an existing one?

It really comes down to a series of personal preferences and needs, which is why the question can never be answered. However, there are a few "truths" about building a new home vs. buying an existing one that haven't changed over time, and hopefully these will help you if you happen to be in the buying market. (Note: Because this article is Part 1 of a series on this topic, the following list is by no means comprehensive, so please stay tuned for more later.)

Truth #1: Building a new home is almost always more expensive than buying an existing home. 

This may not always be immediately apparent when you start the home buying process. However, as you move through the process, some "hidden" costs start to appear. When all is said and done, the new home almost always ends up costing more than what a buyer could have purchased in a comparable existing home. 

Some of those "hidden" costs are the fees associated with using the builder's affiliated vendors (e.g. their mortgage companies, title companies, etc.) that don't show up until the closing. Often times, these fees are more expensive than if you had competitively shopped them, but when you buy from a builder, you are usually required to use their vendors. 

Another "hidden" cost is options. Builders, much like auto dealers, advertise their homes at their starting prices, which is another way of saying base price. Often times, the most popular features or hottest trends in new homes are not standard features included in the base price but instead are options that increase the base price of the home. This is where a new home starts really starts to get more expensive than buying an existing home. Because one of the most compelling reasons to build is that you get to build your house just the way you want it, the trap is that you start to think that EVERYTHING has to be just the way you want it. And that mindset can get very expensive very quickly.

I have watched many clients over the years get caught up in the excitement of going to a builder's design studio and selecting options for their new home. Before they knew it, they had added $30K, $40K, sometimes $50K in options because they just had to have ______.  (In full disclosure, my wife and I built a new home a few years ago and had to stop ourselves several times from going over the cliff as well. It's very easy to do.) Related to the hidden cost of options is the "promo." Builders periodically will offer promos of giving away a basement or a bonus room, but what starts out as a "free" basement quickly mushrooms into a $10,000 price increase because adding more than one electrical outlet is an additional cost, lighting is extra, etc. This leads me to the next "truth" about new construction.

Truth #2: It's easy to lose money on building a home if you don't know what you're doing.

I have had to have many difficult conversations over the years with sellers who built a new home in a subdivision a few years earlier and then needed to sell for whatever reason and were faced with the unpleasant prospect of having to sell their home for less than what they paid for it. There are a couple of reasons for this:

The first reason is that, historically, it is difficult to sell an existing home within a new subdivision when the builder is still selling new homes within that subdivision. Often times, existing homeowners can't compete with the builder - the builder can offer buyers the exact model, layout and features that led a buyer to look at a new subdivision in the first place. The builder also has promos that an existing homeowner can't offer. And typically the builder has special teaser mortgage rates that an existing homeowner can't offer. So the only thing an existing homeowner CAN offer is the same house for less than what the builder is selling theirs for, and often, there simply hasn't been enough appreciation in surrounding house prices in a few short years to make that a profitable choice for the existing homeowner.  

The second reason existing homeowners end up selling their newer homes for less than what they paid for them is that they didn't consider the true value of their home when they were building it. Almost always, these homeowners are the ones that just walked into a model, sat down with a salesperson and wrote up a contract. If a broker had been involved in the home buying process, they could have been advised on what features enhance resale value, which lots are more desirable (and it's NOT the corner lot) and whether the price of their home could be supported by surrounding comparable values. That's why last year almost 3/4 of existing homeowners who sold their new construction homes within the first 36 months and used a broker during their new home buying process were able to sell their homes for at or above what they paid for them.  

Truth #3: Having a broker represent you in the new home buying process doesn't cost you anything.

I can't tell you how many buyers believe the myth that the builder is going to cut them a deal or give them a discount on the price if they don't use a broker. This is simply not true. Almost all of the national, publicly-traded builders factor a broker's commission into their standard pricing, and they do not alter that pricing if there is no broker involved. Instead, the money that the builder has allocated for a broker's commission in a deal where there is no broker typically gets retained by the builder, or in some cases, a portion of that money is given to the builder's salesperson as a bonus. The builder's rationale for this is simple: They want to sell more homes, and they recognize that brokers are integral part of achieving that goal. The last thing reputable builders want to do is alienate the realtor community by creating an incentive for their salespeople to cut the broker out of the deal. (Note: A disturbing trend that I have started seeing with a few of the national builders in my area is to have the salesperson refer buyers who walk in off the street to what he/she calls a "preferred realtor" who he/she says can help them sell their existing home at a discount. I don't know if this practice is coming down from the builders' corporate offices or if this is the result of some entrepreneurial salespeople here locally, but my advice to any buyer who is presented with the offer of a "preferred realtor" is this: Buyer Beware. Any realtor who receives referral business from a builder client is going to be beholden to that builder client and not to you, as it is impossible to serve two masters.)      

Hopefully, this has given you some food for thought if you are in the market to buy a home. The next article in this series will address some of the "truths" of buying an existing home, so stay tuned.

Chris Camperelli is the Team Leader for The Elite Realty Pros Brokered by eXp Realty and can be reached at chris@theeliterealtypros.com or at 317-710-5019.